William Poole: 'What made the Fed so successful under Alan Greenspan?'

From prepared remarks by the president of the St Louis Federal Reserve Bank to a meeting of the Western Economics Association, in San Francisco

As far as I know, there has been no comprehensive study of the characteristics of the Greenspan regime. To extend the regime will require an understanding of just what the regime is. First on my list is low-inflation credibility - that is, market confidence that the Fed will conduct policy to yield low inflation averaged over any span of a few years.

Market confidence in the Federal Reserve's ability and willingness to maintain a low trend rate of inflation has been a core characteristic of the Greenspan regime. Greenspan did not achieve instantaneous market confidence when he took office in 1987, but built that confidence quickly during his initial years as Fed chairman.

Institutionalising market confidence is a great accomplishment. However, there is no doubt in my mind that in coming years the markets will be watching closely to see whether chairmen following Greenspan will maintain a low-inflation regime. In recent years, market confidence has been so great that only a string of poor policy decisions would have changed inflation expectations. For example, inflation expectations hardly changed in the aftermath of 9/11 and of the oil price increases of 2004-05.

The next chairman will start with a base of institutionalised confidence, but the market will naturally be somewhat sceptical until the new chairman has established his or her own track record. Put another way, the Fed's inflation-fighting credibility may be somewhat more fragile over the next few years.

Almost certainly, future chairmen will address the issue of whether the bank should adopt a formal inflation target, which many economists and a number of members of the Federal Open Market Committee, including me, have espoused.